CPI inflation predictions and unwarranted speculation

This resulted in predicted values of the CPI out about a year based on M (monetary base minus reserves) and N (NGDP) from today. Since the core CPI data is going to come out about mid-November 2015 (about two weeks) for October 2015, I thought I'd reiterate this prediction. It is notable for predicting a fall in core CPI inflation from December through May of next year, followed by a rise in the summer of next year.

Sometimes tables are easier to read than graphs, so here's the table of predictions from the lag model:

Note that the error is fairly large, but even so we should still see a fall in inflation in the winter/spring of 2016. Also note that CPI tends to run about 30 basis points higher, so here are the "implied" PCE inflation results:

If core PCE and core CPI continue to follow each other (with the 30 basis point adjustment), I am wondering if there will be lots of articles about seriously undershooting inflation in the winter/spring of 2016. Will this have any impact on the US elections? It is hard to tell since the public tends to think inflation = bad. Politics will ignore it and Matthew Yglesias will probably write stories about the "biggest issue not being discussed in the 2016 campaign" [update: here it is, update 2:here's an even better one!**]. With these (advisedly -- potentially) low numbers, will we get QE4? What will the Fed do?

The data don't show the previous downward dip at the beginning of 2015 (associated with the really bad 2014 Q1 NGDP growth number), but the forthcoming dip (associated with the bad 2014 Q4 and 2015 Q1 NGDP numbers but also low base growth) is more sustained, so is more likely to be realized in the data.

In fact, the last time the model showed core CPI inflation this low was just before the recession. That could mean the US NGDP data might show a recession in the next two quarters. However the NGDP-M0 path doesn't seem above trend so this could well be nothing. I will have a look at this indicator in an update to this post.

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Update 1/20/2016

Updated the CPI graph with latest data (first gray line shows last data point available when prediction was made, second shows last available as of update -- thus data between lines is predicted):

Update 11/4/2015

Here is that update. And that indicator actually indicates a recession is possible -- interest rates (the effective Fed funds rate in this case) are above the trendline:

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Update 15 December 2016

Here is the final graph for CPI. As you can see, there is a positive fluctuation in CPI inflation at the same time as a negative fluctuation in the model (in this case, due to a negative fluctuation in lagged NGDP). Overall, the model is biased low (biased error). It's not wholly unprecedented (see 2007-2008), but I'm not sure this model is any more useful that the regular inflation model.

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Update 3 February 2017

Most of the data revisions for inflation are in, so we can officially close this out saying the lagged version is not any better than the regular inflation model. The result was biased low (pce is yellow, cpi is blue):

I will continue to monitor this model to see if it is just useful over the longer run.

This is a topic that has attracted zero attention during the campaign, but whether the Fed adopts his ideas or not will directly touch the lives of every single American. And with two open seats on the Federal Reserve Board of Governors, the next president will have an immediate chance to have an impact on the subject.